Advanced Technical Analysis

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Note: the following analysis is formulated as an assimilation of Fibonacci, DeMark, Elliot Wave and other technical indicators. It is offered as education and not intended as advice in any way.

Summary:

Yesterday's bounce, particularly in the SPX and INDU were highly overlapped, suggesting that it was/is the internal 4th wave of the impulse down that started on 5/4. Short term momentum was not confirming the late PM highs yesterday in these two indices either and, given the current wave count and the SPX 1070/75 and INDU 9825ish targets we have for these indices, suggests that this 4th wave bounce, if not ended already at yesterday's close, could do so this morning. Only a move above SPX 1106 and INDU 10100 would cause us to change this near term technical interpretation. A move thru SPX 1070/75 and INDU 9825ish would cause us to re-evaluate the cautious posture based on the analysis. The intermediate term trend in the SPX and INDU remains the same from yesterday's note: either the very bearish wave (III) down scenario is unfolding (an interpretation that is far less than clear) or a double zig-zag correction from the annual highs is taking place that will lead to slightly lower levels before a material bounce takes place. At this juncture, both are undesirable technical conclusions given the evidence presented.

As for the NDX, it seems to be in its own world: the 1400-1430 range has largely contained prices for the last 7 sessions. This is remarkable for a number of reasons. First, it is a clear out performance vs. the SPX and INDU. Second, the longer and tighter such sideways consolidations are, the more explosive they tend to come out of the range. Third, the overlap in prices does not lend a great deal of clarity to a short or intermediate term trend conclusion. For now we'll just have to wait and see how the NDX comes out of this range. It's hard to imagine the SPX and INDU breaking down to new lows without the NDX, or indeed, the opposite: the NDX breaking out without the SPX and INDU tagging along.

The SPX bounced yesterday in what appears to be 4th wave of the impulsive 5-wave move off the 5/4 highs. Breadth and ticks were decidedly better than Monday's showing, but volume was 20% lighter (1.5B shares vs 1.85B) and short term momentum (13 minute charts and less) was not confirming the late PM price highs. All of these conditions suggest that another impulsive wave lower is needed before we can anticipate a larger degree bounce worth playing. As we have stated, an initial target for that support is the 1070/1075 area if the double zig-zag correction is playing out (see yesterday's note for details) from the annual highs. If the much more bearish wave (III) scenario is playing out these prices will not hold the next leg of the decline and instead the SPX will move rapidly toward the 1030/40 range.

The conundrum we have with the current technical indicators we follow is this: if the very bearish wave (III) down scenario were playing out, we would expect the technology sectors (the SOX, the NDX and the Nasdaq Composite) to be the weakest of all the indices. After all, the NDX was up 96% from the October 2002 lows while the SPX and INDU were up 51% and 49% respectively. If the market was about to come unhinged and break way to the downside as a wave (III) lower would imply, one would expect the tech sector to be leading the way both in price terms as well as in terms of market internals (breadth, ticks, etc.). It is possible that the techs are consolidating while the SPX and INDU play catch up: the NDX is down 8.8% from its January high as of yesterday while the SPX is down 5.8% from its March high. But wave (III)'s tend to be violent and ruthless to riskier (high beta) assets; and if a wave (III) were just getting started, we would not be expecting such price action in the tech complex. Indeed: the SOX index is now up 8.6% since its 5/3 lows and is now up 6 straight sessions in a row. We have to go back to the period 10/8/03 to 10/15/03 to find 6 straight sessions of higher closes in the SOX. It is possible that the techs are setting up for a major decline as per the wave (III) down scenario, it's just not a high confidence call.

Given the above concerns we still have about the ultra-bearish scenario, we think it is best to look at shorter time frames until these larger uncertainties resolve themselves. To that end, the bounce that the SPX put in yesterday was overlapped and looked classically corrective. If the SPX did not already put in a 4th wave bounce high, it could do so this AM with a move to the 1096/98 area where it should find stiff resistance and move to our lower target of 1070/74. Traders may see a move up to the 1096/98 area with a move thru 1106 an area to re-evaluate technically, for a move to lower supports.

The Nasdaq 100 (NDX)

The NDX specifically and the technology complex generally seem to be in their own world, technically speaking. The NDX gapped higher on the open and never looked back, closing near the highs of the day. Nasdaq breadth and ticks rebounded strongly from Monday's lows but volume contracted 16% and short term momentum, like the SPX, was not confirming the late afternoon thrust, suggesting that whatever degree of bounce this is (impulsive to 1425/27 or a 3-wave correction that ended at yesterday's highs), it is soon coming to some degree of correction.

The pattern off the Monday lows is open to some interpretation but looks conspicuously like a "5" wave impulsive move if a new high is struck today in the 1425/27 area. This would imply that the Monday low was an important bottom of some degree and that, after a 3-wave pullback to phi support, another impulse wave up could be seen. At this point it's speculation since we haven't seen a new high in the 1425/27 area. The difficulty we have with this assessment is that it is so contrary to the SPX and INDU assessments. Our confidence in the technical indicators goes up meaningfully if all three important indices correlate. The current SPX and INDU count calls for a 2% move lower if not much more. If a new high is struck today in the 1425/27 area, that would not fit well with the SPX and INDU conclusions. For now then, the NDX picture remains muddy; we'll simply have to stand aside until a clearer conclusion can be reached that coincides with the SPX and INDU conclusions.

As we discussed above in the SPX highlights, the techs have outperformed meaningfully of late. This is decidedly not the type of price action one would expect if prices were on the verge of a major impulse wave down. That divergence would be even more marked if a clean "5" wave impulsive move off the Monday lows can be identified in today's session. For now we'll simply have to observe the price action and then make a call once a trend of some degree emerges.

The same comments for the INDU as the SPX. A 4th wave bounce seems to be largely complete (if not already complete). A move today to the 10050 area could end the overlapping 4th wave corrective bounce. Recall the 9825 area as an important Fibonacci projection for this current impulse wave down that does not seem nearly complete.

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